NATIONAL NEWS

Fed raises key rate by a half-point in bid to tame inflation

May 4, 2022, 1:12 PM | Updated: Jun 13, 2022, 11:01 am

Federal Reserve Chairman Jerome Powell testifies during the Senate Banking Committee hearing titled...

Federal Reserve Chairman Jerome Powell testifies during the Senate Banking Committee hearing titled “The Semiannual Monetary Policy Report to the Congress” in Dirksen Building in Washington, D.C., on Thursday, March 3, 2022. (Tom Williams/CQ Roll Call)

(Tom Williams/CQ Roll Call)

WASHINGTON (AP) — The Federal Reserve intensified its fight against the worst inflation in 40 years by raising its benchmark short-term interest rate by a half-percentage point Wednesday — its most aggressive move since 2000 — and signaling further large rate hikes to come.

The increase in the Fed’s key rate raised it to a range of 0.75% to 1%, the highest point since the pandemic struck two years ago.

The Fed also announced that it will start reducing its huge $9 trillion balance sheet, which consists mainly of Treasury and mortgage bonds. Those holdings more than doubled after the pandemic recession hit as the Fed bought trillions in bonds to try to hold down long-term borrowing rates. Reducing the Fed’s holdings will have the effect of further raising loan costs throughout the economy.

All told, the Fed’s credit tightening will likely mean higher loan rates for many consumers and businesses over time, including for mortgages, credit cards and auto loans.

Speaking at a news conference Wednesday, Chair Jerome Powell made clear that further large rate hikes are coming.

“There is a broad sense on the committee,” he said, referring to the Fed, “that additional (half-point) increases should be on the table in the next couple of meetings.”

But Powell also sought to downplay any speculation that the Fed might be considering a rate hike as high as three-quarters of a percentage point.

“A 75-basis-point hike is not something that the committee is actively considering,” he said — a remark that appeared to cause stock indexes to rise.

With prices for food, energy and consumer goods accelerating, the Fed’s goal is to cool spending — and economic growth — by making it more expensive for individuals and businesses to borrow. The central bank hopes that higher borrowing costs will slow spending enough to tame inflation yet not so much as to cause a recession.

It will be a delicate balancing act. The Fed has endured widespread criticism that it was too slow to start tightening credit, and many economists are skeptical that it can avoid causing a recession.

In their statement Wednesday, the central bank’s policymakers said they are “highly attentive to inflation risks.” The statement also noted that Russia’s invasion of Ukraine is worsening inflation pressures by raising oil and food prices. It added that “COVID-related lockdowns in China are likely to exacerbate supply chain disruptions,” which could further boost inflation.

Inflation, according to the Fed’s preferred gauge, reached 6.6% last month, the highest point in four decades. Inflation has been accelerated by a combination of robust consumer spending, chronic supply bottlenecks and sharply higher gas and food prices, exacerbated by Russia’s war against Ukraine.

Starting June 1, the Fed said it would allow up to $48 billion in bonds to mature without replacing them, a pace that would reach $95 billion by September. At September’s pace, its balance sheet would shrink by about $1 trillion a year.

Powell has said he wants to quickly raise the Fed’s rate to a level that neither stimulates nor restrains economic growth. Fed officials have suggested that they will reach that point, which the Fed says is about 2.4%, by year’s end.

The Fed’s credit tightening is already having some effect on the economy. Sales of existing homes sank 2.7% from February to March, reflecting a surge in mortgage rates related, in part, to the Fed’s planned rate hikes. The average rate on a 30-year mortgage has jumped 2 percentage points just since the start of the year, to 5.1%.

Yet by most measures, the overall economy remains healthy. This is especially true of the U.S. job market: Hiring is strong, layoffs are few, unemployment is near a five-decade low and the number of job openings has reached a record high.

Powell has pointed to the widespread availability of jobs as evidence that the labor market is tight – “to an unhealthy level” that would tend to fuel inflation. The Fed char is betting that higher rates can reduce those openings, which would presumably slow wage increases and ease inflationary pressures, without triggering mass layoffs.

For now, with hiring robust — the economy has added at least 400,000 jobs for 11 straight months — and employers grappling with labor shortages, wages are rising at a roughly 5% annual pace. Those pay raises are driving steady consumer spending despite spiking prices. In March, consumers increased their spending 0.2% even after adjusting for inflation.

Even if the Fed’s benchmark rate were to go as high as 2.5% by year’s end, Powell said last month, the policymakers may still tighten credit further — to a level that would restrain growth — “if that turns out to be appropriate.”

Financial markets are pricing in a rate as high as 3.6% by mid-2023, which would be the highest in 15 years. Shrinking the Fed’s balance sheet will add another layer of uncertainty surrounding how much the Fed’s actions may weaken the economy.

Complicating the Fed’s task is a slowdown in global growth. COVID-19 lockdowns in China are threatening to cause a recession in the world’s second-largest economy. And the European Union is facing higher energy prices and supply chain disruptions after Russia’s invasion of Ukraine.

What’s more, other central banks around the world are also raising rates, a trend that could further imperil global growth. On Thursday, the Bank of England is expected to raise its key rate for the fourth straight time. The Reserve Bank of Australia increased its rate Tuesday for the first time in 11 years.

And the European Central Bank, which is grappling with slower growth than in the United States or the United Kingdom, may raise rates in July, economists expect.

KSL 5 TV Live

National News

People inspect damage and recover items from their homes following Israeli air strikes on February ...

Waafa Shurafa and Samy Magdy

U.S. says Israel has agreed to the framework for a Gaza cease-fire. Hamas now must decide

A senior U.S. official says Israel has essentially endorsed a framework of a proposed Gaza cease-fire and hostage release deal, and it is now up to Hamas to agree to it.

6 hours ago

yellow tape crossing blue and red lights...

Associated Press

Body parts of 2 people found in Long Island park and police are trying to identify them

Police on New York's Long Island were trying to identify human remains found in a popular suburban park that appear to be from a man and a woman.

8 hours ago

A vehicle drives through blowing snow near Interstate 80 (I-80) in the Sierra Nevada mountains at t...

Scott Sonner

Powerful storm in California and Nevada shuts interstate and dumps snow on mountains

Tens of thousands of customers are without power early Saturday and a 100-mile stretch of Interstate 80 remains closed indefinitely.

20 hours ago

FILE: Ballots are counted by Maricopa County Elections Department staff ahead of Tuesdays election ...

Associated Press

Arizona’s new voting laws that require proof of citizenship are not discriminatory, a US judge rules

A U.S. district judge has ruled Arizona legislators did not discriminate when they adopted laws requiring counties to verify the status of registered voters who haven’t provided proof of U.S. citizenship.

20 hours ago

Boeing fuselages leave the supply line for further construction....

Chris Isidore and Gregory Wallace, CNN

Boeing wants to buy back the company that builds the body of its troubled Max planes

Boeing said it is in talks to buy Spirit AeroSystems, a major supplier that was part of Boeing until a 2005 sale and one that was also involved in an Alaska Airlines mid-air door plug blowout.

23 hours ago

A killer whale known as Starboard preys on a great white shark in June off the South African coast,...

 Katie Hunt, CNN

A lone orca slayed a great white in less than two minutes. Scientists say it could signal an ecological shift

A pair of orcas have been killing great whites along a stretch of South African coastline.

23 hours ago

Sponsored Articles

Modern chandelier hanging from a white slanted ceiling with windows in the backgruond...

Lighting Design

Light Up Your Home With These Top Lighting Trends for 2024

Check out the latest lighting design trends for 2024 and tips on how you can incorporate them into your home.

Technician woman fixing hardware of desktop computer. Close up....

PC Laptops

Tips for Hassle-Free Computer Repairs

Experiencing a glitch in your computer can be frustrating, but with these tips you can have your computer repaired without the stress.

Close up of finger on keyboard button with number 11 logo...

PC Laptops

7 Reasons Why You Should Upgrade Your Laptop to Windows 11

Explore the benefits of upgrading to Windows 11 for a smoother, more secure, and feature-packed computing experience.

Stylish room interior with beautiful Christmas tree and decorative fireplace...

Lighting Design

Create a Festive Home with Our Easy-to-Follow Holiday Prep Guide

Get ready for festive celebrations! Discover expert tips to prepare your home for the holidays, creating a warm and welcoming atmosphere for unforgettable moments.

Battery low message on mobile device screen. Internet and technology concept...

PC Laptops

9 Tips to Get More Power Out of Your Laptop Battery

Get more power out of your laptop battery and help it last longer by implementing some of these tips from our guide.

Users display warnings about the use of artificial intelligence (AI), access to malicious software ...

Les Olson

How to Stay Safe from Cybersecurity Threats

Read our tips for reading for how to respond to rising cybersecurity threats in 2023 and beyond to keep yourself and your company safe.

Fed raises key rate by a half-point in bid to tame inflation